Priscilla Toomey: The Why, When, and How of Mortgage Pre-Approvals; Prerequisite for Buying a Home Print

Aug. 6, 2014:  With the fall market only a few weeks away, it's time to address the why, when, and how of pre-approvals. When people are eager to find a house, they think "real estate," but the best thing for them to do is think "money."

Specifically, they need to know what they can afford. The operative word in that sentence is "know," not "estimate" or "guess," and that's a very important distinction. Why say this? Because people so often say, "I know I can get a pre-approval when I find the right house."

Why: A couple of things to keep in mind about "why" when it comes to pre-approvals. Many "all cash" buyers intend to get a mortgage anyway; they just want to be in a stronger bidding position by not having a mortgage contingency. Yet, among the important reasons to get a pre-approval is that it is a way for the lender to "vet" a buyer. Sellers want to know that a buyer is financially qualified before they accept that buyer's offer.

The lender is also advising the buyer on what that lender believes the buyer can afford. Better to shop for a house knowing this than guessing. Of course, the buyers can provide "proof of funds" as an alternative to the pre-approval in order to show that they have sufficient assets to close on the purchase. Not everyone wants to disclose all of that information up front, however.

When: Getting pre-approved before, or as soon as, a buyer starts looking is wise. That's because sellers don't want to accept an offer from someone until they know that buyer has sufficient funds to complete the purchase. People who start to shop without a pre-approval run the risk of finding the home of their dreams only to have to wait until their pre-approval comes through before they can make a serious bid. They then run the risk of losing the house to a better-prepared buyer in the meantime.

How: Find out what the lender requires you to submit. Pre-approvals are based on verified documentation. If a so-called pre-approval letter is based on a conversation, it's not a pre-approval and seasoned real estate professionals know it. Gather all the documents, submit them to the lender, and find out if the lender needs anything else.

Ask to be pre-approved for the maximum your can qualify for, not the price of a particular house. That's because you don't want to have to go back again and again as the price point changes, for example, in a bidding war.

If a buyer needs to get the pre-approval updated from time to time, the lender can do that. That way it will stay current without having to start from scratch. Sellers know a buyer may not be willing to pay a particular amount, but this way they'll know that the buyer is qualified up to that amount, and that gives them a greater degree of comfort. A pre-approval meeting these parameters puts a buyer in the best position to make a strong offer and gives the buyer credibility with a seller. It's worth the effort.

Pictured here:  Priscilla Toomey, associate broker, JD, ABR, Top5, certified EcoBroker, SRES with Julia B. Fee/Sotheby's International Realty; cell, 914-559-8084; email, CLOAKING .

Photo courtesy Julia B. Fee/Sotheby's International Realty